VAT and charities

The basic idea behind VAT is fairly straightforward – it’s a sales tax. 

But for voluntary organisations, it’s not always straightforward working out whether what you do counts as a ‘sale’ in VAT terms. There are also a lot of exemptions and special conditions for charities that mean not everything can be worked out, sometimes you just need to look up the rules. 

Then there are the practicalities of how you actually operate VAT processes.

This page should give you enough of an understanding so you to know what red flags to look out for, when to ask for advice and should point you in the direction of more detailed information. If in doubt, take advice sooner rather than later.

GOV.UK has a list of all the VAT rates and related VAT notices which can be quite useful as a quick reference.

There’s also a basic how-to guide which has some practical pointers.

Or you can contact their VAT enquries team 0300 200 3700 08.00-18.00, Mon-Fri

• VAT is a tax on sales/supplies which is charged by VAT-registered organisations on certain goods and services (known as taxable or VATable supplies).
• Output VAT – VAT that you add to customer invoices on your sales (outputs) and then pay to HMRC
• Input VAT – VAT that your supplier adds to their invoices for your purchases (inputs)
• Recovering VAT - if you are VAT registered, you can deduct the total input VAT you incur on purchases relating to your VATable supplies from the total output VAT you have collected and only pay a net amount to HMRC – this is what’s called recovering VAT.

Whether you have to start charging VAT on your services depends on two things:

• The types of activities you do 
• The level of income generated by VATable activities – VAT threshold

VAT types of activities

Business activities

By default VAT is charged on a supply of goods or services in the course of a ‘business’ activity, but when HMRC is talking about business, that covers all kinds of non-commercial services too. 

The idea of the supply is central – it’s an exchange: goods or services for something in return.

The biggest grey area is often around defining if something is a grant or a service contract. And there, your questions to ask are:

• does the donor receive anything in return for the funding?
• if the donor does not benefit, does a third-party benefit instead? And if so, is there a direct link between the money paid by the funder and the supply received by the third party?
• are any conditions attached to the funding, which go beyond the requirement to account for the funds?

You can look for more advice on the Charity Tax Group’s website: 

Exempt supplies

Quite a lot of supplies that voluntary organisations make have been specifically exempted from VAT.

Take advice if you think you are making exempt supplies, because there can be very precise rules that may catch you out – for example, vocational training is exempt if it is delivered by an eligible body and any profit is used to continue similar supplies.

The impact of exempt activities:

• No VAT charged on income
• Income does not count towards VAT threshold
• No right to recover input VAT incurred on related purchases
• They need to be separately identified if you are registered for VAT for partial exemption calculation

Examples of exempt supplies:

• Education and vocational training
• Health and welfare services
• Cultural services
• Sports facilities (but precise details currently in debate)
• Sales in connection with a qualifying fundraising event 

The Charity Tax Group has more information on how the exemptions on each of these work and latest updates 

Taxable Supplies

Any business supply that is not specifically exempted is referred to as a taxable supply, and once your income from taxable supplies exceeds the VAT Registration Threshold, you must register for VAT and charge VAT on these supplies at one of 3 rates:

• Standard rate – default rate for taxable supplies (currently 20%)
• Zero rate – 0% applies to specific supplies identified in schedule 8 VAT Act 1995 – this is NOT the same as not charging VAT because something is exempt or outside the scope
• Reduced rate – applies to specific supplies identified in schedule 7A VAT Act 1995 (currently 5%)

The impact of taxable activities:

• VAT charged at relevant rate on income
• Income counts towards VAT threshold
• Able to recover input VAT incurred on related purchases

Examples of taxable supplies (and some issues):

• Sales of donated, made and bought-in goods
• Supplies of food and catering – definitely take advice on the many detailed rules about standard and zero rating (remember 'Pastygate'? – the VAT rate of a sausage roll depends on whether it’s freshly baked and just cooling down or whether you are keeping it warm)
• Advice and consultancy
• Sponsorship/advertising/use of logos – if a company gives you money and asks you to display their logo, or asks to use your logo, you need to assess the line between selling advertising (or your good name) and receiving a donation.
• Management/administration charges between a charity and its subsidiary
• Vehicle and equipment hire
• Some property rentals

Non-business activities/outside the scope

Non-business activities in the voluntary sector are where something is given with no expectation of a return: a donor gives money without wanting a service or a service is delivered free or with minimal contribution from the beneficiary. This is often what the general public understand by charity. 

Examples of non-business supplies.

• Grants and donations – as long as the recipient isn’t expected to provide any specific goods or services in return
• Delivery of a free service, or giving away goods
• Investment income (defined in VAT law not specific to charities)

If you have general queries about VAT you can webchat or call 0300 200 3700 08.00-18.00, Mon-Fri

VAT Threshold/Registration

• You must register if turnover on taxable supplies exceeds VAT registration threshold (from April 2018: £85,000)
• You may register if you make some taxable supplies
• You may not register if you make no taxable supplies

You might register if your taxable supplies were below the threshold if you thought the benefit of the VAT you could recover on your purchases outweighed the cost of administering the VAT processes and the potential additional VAT burden on your users.  It isn’t common, and you should take advice before you do that.

The WYCAS Good Practice Guide on VAT, and Sayer Vincent Made Simple Guide  give more details and advice on registering for and calculating VAT.

General rules:

• If your organisation only has exempt or non-business activities, you may not register for VAT
• If you aren’t registered for VAT, you cannot recover VAT paid (but check for special reliefs and schemes), but, contrary to popular belief, registering for VAT doesn’t give you a blanket right to recover
• If you are registered for VAT, you cannot reclaim VAT on purchases relating directly to your exempt and non-business activities

There are certain things where charities pay less VAT – but there are conditions attached so check out the details on the items listed.

You will have to provide your supplier with an eligibility declaration, and don’t expect them to know about these reliefs, you should arm yourself with the knowledge (they may well not be aware of the details if they haven’t come across it before).

Zero rated purchases

• Advertising and items for collecting donations – advertising includes recruitment advertising
• Aids for disabled people
• Construction services
• Drugs and chemicals
• Equipment for making ‘talking’ books and newspapers
• Lifeboats and associated equipment, including fuel
• Medicine or ingredients for medicine
• Resuscitation training models
• Medical, veterinary and scientific equipment
• Ambulances
• Goods for disabled people
• Motor vehicles designed or adapted for a disability
• Rescue equipment

The Charity Tax Group pages are useful.

Reduced rate purchases

Charities can pay 5% VAT on fuel and power for:

• residential accommodation (for example, a children’s home or care home for the elderly)
• charitable non-business activities (for example, free daycare for the disabled)
• small-scale use (up to 1,000 kilowatt hours of electricity a month or a delivery of 2,300 litres of gas oil).

Further guidance at Charity Tax Group

Once you are registered, you usually do a VAT return once every three months. The GOV.UK pages give a good outline of what is required.

Partial exemption happens when an organisation is registered for VAT but not all its supplies are taxable supplies – as is true for many VAT-registered voluntary organisations – and it can only recover a proportion of the input tax paid on its purchases.

The calculation is quite detailed and you should take advice on how best to approach it for your organisation. Your advisor will probably set up a spreadsheet to create the necessary calculations for your returns. 

In your accounting you need to be able to identify for all purchases whether they relate to activities that are taxable, exempt, outside the scope, or are general costs that support a number of projects like utilities so that you can carry out the partial exemption calculation.

For chapter and verse see HMRC VAT Notice 706, or, both the WYCAS Good Practice Guide on VAT,  and Sayer Vincent Made Simple Guide have reasonable explanations.

You need to be aware that there are specific rules for any cross-border supplies and the Charity Tax Group advice is useful for this.